Blue states join red states on tax reform

Though conservative “red” states have more competitive tax systems and regulatory systems, legislators in many liberal “blue” states are beginning to respond with good reforms of their own, according to the latest release of the American Legislative Exchange Council’s Rich States, Poor States report.

In all, 17 states enacted important tax reforms in 2013, making it “a standout year for tax changes in the states,” according to the authors.

ALEC released the report’s State Economic Competitiveness Index in April and in August followed with the release of three new chapters: one on important state policy developments that occurred during 2013 and the first half of 2014; the second on the migrations of people and their wealth into and out of states; and the third on the real-world effects of government policies including minimum wage laws, estate or “death” taxes, and tax burdens.

Coming to Grips with Reality

“There’s been positive tax reform” in many states including North Carolina, Indiana and even Maryland, “which has started to show a pulse after many years of bad economics,” said report co-author Jonathan Williams, director of ALEC’s Center for State Fiscal Reform. His co-authors are economists Stephen Moore of the Heritage Foundation and Arthur Laffer of Laffer Associates, an economic research and consulting firm.

In a conference call, they noted Maryland legislators passed a bill to raise the estate tax exemption almost fivefold over the next five years. The larger the exemption, the less tax that must be paid. In Rhode Island, another sky-blue state, legislators okayed increases in the estate tax exemption and cut the corporate income tax rate, from 9 percent to 7 percent. New York, which ALEC ranks last in competitiveness, also saw its governor sign a bill to reduce the state’s corporate tax rate.

He said most states throughout the Midwest “have been realizing the need to compete.” Among them: Kansas, Michigan, Missouri, and Wisconsin.

Even Illinois, which is dominated by Democrats and has one of the worst competitiveness rankings in the nation, saw legislators back away from calls to impose a tax surcharge on millionaires and go from a flat-rate income tax to a “progressive” income tax with higher tax rates on higher incomes.

On balance, though, Illinois, Maryland, Minnesota, New York and certain other states appear to be “trying to tax themselves into prosperity,” said Laffer, while other states have embraced more pro-growth policies.

These stark differences are giving the nation a chance to see the results over the long-term. He said he expects the pro-growth states will be the winners, as they have been in recent decades, as evidenced by big shifts of populations — and their wealth — out of states with high taxes and heavy regulations to states with lower taxes and lighter regulations.

Moore noted Illinois has been on a tax-hike binge, yet remains a fiscal disaster.

“Illinois is a debacle, a total debacle,” he said. “They still have huge deficits, huge unpaid bills, and they’ve raised taxes more than any other state in recent years.”

Meanwhile, Illinois’s neighbor to the north, Wisconsin, has enacted more than $1 billion of tax cuts since 2013 and is projecting budget surpluses.

Silver Linings, Black Marks

Moore and his co-authors are bipartisan in their praise and blame.

Moore noted Virginia, under a Republican governor, has fallen in the competitiveness rankings, the result of “tax increases that were harmful” and “wasted money on an absurd transportation policy” that legislators passed “at the behest of the transportation and construction industries.

“It was the worst of Republicanism.”

State Rep. Ken Wyler (R-NH), chairman of ALEC’s Tax and Fiscal Policy Task Force, said he believes the report is useful “because people can track changes that states are making” and the results they are getting.

“My state of New Hampshire has stood still and we’ve gotten worse in the rankings because other states are doing positive changes.”